Lotte affiliates’ credit ratings downgraded all at once

The ratings of Lotte's subsidiaries have been downgraded en masse. Lotte Chemical Corp., the group's cash cow, was cut to AA from AA+.

NICE Investors Service, the South Korean credit rating agency, lowered the ratings of Lotte Chemical, Lotte Corp., Lotte Rental Co. and Lotte Capital on Tuesday. Lotte Chemical was downgraded to 'AA' (stable) from 'AA+' (negative), Lotte Corp. to 'AA-' (stable) from 'AA' (negative), Lotte Rental to 'A+' (stable) from 'AA-' (negative) and Lotte Capital to 'A+' (stable) from 'AA-' (negative).

NICE placed Lotte Corp., Lotte Rental, Lotte Capital and Lotte Chemical on review for downgrade in October last year.

Lotte Chemical, the group's main cash-generating affiliate, was cited for its heavy borrowing burden. Lotte Chemical's net borrowings stood at 3.3 trillion won (about $2.5 billion) at the end of March, up more than 4 trillion won from the end of 2021, according to NICE.

The business environment has also deteriorated. "Profitability indicators have been improving since the third quarter of last year, but the scope for improvement is likely to be limited due to the expansion of Chinese companies," said NICE.

The downgrade of Lotte Chemical followed a string of downgrades for other affiliates, including Lotte Corp. and Lotte Capital. This is because they are less likely to be supported by their core subsidiary, Lotte Chemical.

The creditworthiness of other affiliates is also shaky. Lotte E&C, Lotte Himart and Lotte Rental still have 'negative' outlooks on their ratings. This means they are likely to be downgraded in the future.

The credit downgrade has also put Lotte Group's liquidity in jeopardy. Lotte Corp. and its major affiliates had previously secured 5 trillion won financing deal with four major banks. However, if the downgrade makes it difficult to raise funds in the corporate bond market, there are concerns that the company could once again face a liquidity crisis.

Write to Hyun-Ju Jang at blacksea@hankyung.com